Integration offers potential

This article is part of
Distribution funds - October 2013

Alastair Gunn and Rhys Petheram have very different skill sets – but the decision to combine their respective expertise at the helm of the Jupiter Distribution Fund has been a huge success for investors who have enjoyed strong risk-adjusted returns.

The co-managers, who took over responsibility for the Fund in July 2010 from the retiring Tony Nutt, have forged a close working relationship with Rhys supplying the bond expertise and Alastair bringing his years of experience working in equities.

“We meet companies together and look at them from a bottom up perspective to decide whether we’re interested from an equity or bond perspective,” explains Alastair. “In some cases we’ll own both – or we’ll play the debt and equity at different points in time.”

Article continues after advert

This integrated approach has worked extremely well for the Fund, which aims to provide a sustainable level of income and the prospect of capital growth over the long term. This is done by investing in an actively balanced portfolio of fixed interest securities and mainly UK equities.

The Fund, which was launched back in 2002, is seen as a potentially good vehicle for conservative investors that have held assets in cash or bonds but are now looking for a gentle way in which to access equities.

“A lot of people don’t feel optimistic about the outlook so this fund could provide a way for them to move slightly up the risk curve by introducing a bit of equity exposure,” explains Alastair.

As well as delivering a monthly income, the managers aim to retain a level of liquidity and flexibility within the Fund. The fact it has low fees* and a strong performance track record are seen as other benefits to potential investors.

The portfolio is broadly split 70 per cent – 30 per cent in favour of bonds, with Alastair exploiting equity valuation anomalies and focusing on companies that can grow steadily due to strong balance sheets, healthy cash flows and barriers to competition.

Rhys, meanwhile, looks for higher quality, primarily investment grade bonds of well-managed companies that he feels are reasonably valued for the yield on offer.

He may also have exposure to government bonds. An illustration of how well the integrated approach works can be found in their approach to an investment in Spirit, the pub company.

“In late 2011 I was buying the bonds because management were taking steps to improve credit quality, mainly by paying down debt” explains Rhys. “However, as deleveraging progressed, management became more focused on generating shareholder returns, so by the middle of 2012 it started to look interesting from an equity perspective.”

As Rhys began taking some profits – ahead of exiting the position by early 2013 - Alastair started buying the equity. “Since the first quarter of this year the bonds have done very little and the equity has continued to re-rate,” he notes.

Since taking the reins the co-managers have generated a significant proportion of their returns through exposure to telecoms – especially BT and Vodafone – as well as UK consumer oriented names such as William Hill, Next and Cineworld.